Violin v. Fireman's Fund Insurance

OPINION

By the Court,

Thompson, J.:

This is an action by the insureds on a policy of insurance covering a Guadagnini violin of the agreed value of $10,000. Following loss of the violin, the insurer Fireman’s Fund Insurance Company canceled the policy, tendered return of the premium paid and denied liability on the ground that the insureds had made a fraudulent, material misrepresentation in their application for insurance. The lower court ruled in favor of the insurer, and this appeal by the insureds followed. The sole question is whether, on the facts here disclosed, the insurer waived its right to cancel the policy or is estopped to deny liability. We have concluded that factors favoring the application of the doctrine of waiver against the insurer are here present, thus precluding avoidance of liability. Accordingly, we reverse.

The question asked on the application for insurance with which we are concerned was, “Has any company ever refused or canceled insurance?”¹ The applicants answered, “No.” The answer was false. Four years earlier the same insurer, Fireman’s Fund, had canceled a policy which it had issued to the same insureds covering musical instruments. The lower court found that this misrepresentation was material to the risk against which the applicants sought coverage and was not innocently made. Notwithstanding this fact the insureds insist that the insurer may not avoid liability as it was chargeable with knowledge of the prior cancellation because of information in its own records and chose to write the present policy anyway.

1. It is, of course, true that one has an obligation not to speak falsely when inducing another to make a bargain. This worthy rule is recognized both by statute and case law in Nevada. NRS 686.190; Poe v. La Metropolitana Co., 76 Nev. 306, 353 P.2d 454 (1960); Smith v. North American Ins. Co., 46 Nev. 30, 205 P. 801 (1922). Thus, absent factors favoring the application of the doctrines of waiver or estoppel, an insurer is not bound by an insurance contract that he was induced to make by the fraudulent misrepresentations of the insured. The application for insurance in the instant matter contained the following language, “Signing this form does not bind the Proposer or the Company to complete the insurance, but it is agreed that this form shall be the basis of the contract, should policy be issued. If any of the above questions have been answered falsely or fraudulently the entire insurance shall be null and void and all claims thereunder shall be forfeited.” Cf. Poe v. La Metropolitana Co., supra, where similar language was used in the application for insurance and noted by this court in affirming a judgment for the insurer. Relying upon the quoted clause of the application for insurance, the claims superintendent of Fireman’s Fund, after notice of loss, advised the insureds that the application was incorrectly filled out “resulting in a non-disclosure of information material to our acceptance of the risk,” rescinded the policy and tendered return of the premium paid.

The application for insurance was not made a part of the insurance contract by incorporation by reference, i.e., a statement in the policy that the application is made a part of the policy, Phoenix Mutual Life Insurance Co. v. Raddin, 120 U.S. 183, 7 S.Ct. 500, 30 L.Ed. 644 (1887), or by endorsement on the policy itself. Smith v. North American Insurance Co., supra; cf. Universal Underwriters v. Snyder, 81 Nev. 315, 402 P.2d 483 (1965). Thus the answers in the application did not become warranties or conditions, but are representations collateral to the contract of insurance. The distinction between a warranty and a representation is sometimes of controlling significance in insurance litigation. The following authorities articulate that distinction in depth: Patterson, “Warranties in Insurance Law,” 34 Colum.L.Rev. 595 (1934) ; Kimball, “Warranties, Representations and Concealment,” 4 Utah L.Rev. 456 (1955) ; Patterson, “Essentials of Insurance Law” § 76, p. 384 (2d ed.); Phoenix Mutual Life Insurance Co. v. Raddin, supra; Moulor v. American Life Insurance Co., 111 U.S. 335, 4 S.Ct. 466, 28 L.Ed. 447 (1884). In general terms a warranty in insurance law is a term of the insurance contract which does not create an obligation on the part of the warrantor, but which creates a condition of the insurer’s duty to pay the loss. The traditional view is that a warranty must be strictly complied with and, once a breach of warranty has occurred, the insurer may avoid the policy. The ancient Nevada case of Healey v. Fire Insurance Company, 5 Nev. 268 (1869), is an example of the traditional, orthodox view. On the other hand, a representation is not a term of the insurance contract and, though it may also, if false, and material to the risk, supply the basis for a rescission of the insurance contract by the insurer, courts tend to be less strict in their treatment of a representation than is the case when a warranty is involved. Here the insurer’s rescission rests solely upon a false representation by the applicants which was collateral to the contract of insurance, though perhaps an inducement to its issuance, and not upon any claim that a term of the insurance contract was breached.² With these preliminary observations in mind we turn to discuss the question presented by this appeal.

2. The insureds do not challenge the findings below, that they fraudulently misrepresented a fact material to the risk when applying for coverage¹. However, they do contend that the insurer may not rely upon that misrepresentation to avoid liability, for it had in its possession full information about the prior cancellation, and elected to issue the present policy in spite of such knowledge.

The insurer’s claims department, Los Angeles office, did have a record of the prior loss and subsequent cancellation. However, no agent of that department of the insurance company was in any way connected with the solicitation or issuance of the present policy, and neither the insurer’s application-taking agent nor its policy-writing agent was aware that the applicants had misrepresented a material fact in requesting coverage. It is also apparent that, because of the expense, volume and complexity of its business, the insurer in this and related situations believed itself free to rely upon the representations of fact contained in an application for insurance, and had not instituted a program for communicating information in the files of the claims department to those in the production end of the business. Pointing primarily to these circumstances the insurance company argues that it would be improper to invoke the doctrines of waiver or estoppel against it and authorize a policy liability, for we would be rewarding claimants who are not in court with clean hands.

This argument is not without persuasion. Yet it finds only meager support in case law. See Rhode v. Metropolitan Life Ins. Co., 129 Mich. 112, 88 N.W. 400 (1901); Great Northern Life Ins. Co. v. Vince, 118 F.2d 282 (6th Cir. 1941), which stand for the principle that earlier records do not necessarily put the company on notice unless there is some circumstance to direct its attention to them. See also Schrader v. Prudential Ins. Co., 280 F.2d 855 (5th Cir. 1960), dealing with group insurance. The overwhelming body of authority favors the insured and holds that the insurer, as a matter of law, is chargeable with knowledge of the misrepresentation, because of full information about it present in its own files. See: McKinnon v. Massachusetts Bonding & Ins. Co., 213 Wis. 145, 250 N.W. 503 (1933), (theft policy); Kennedy v. Agricultural Ins. Co. of Sioux Falls, 21 S.D. 145, 110 N.W. 116 (1906), (fire policy); Kelly v. Metropolitan Life Ins. Co., 44 N.Y.S. 179 (1897), (life policy) ; Atlas v. Metropolitan Life Ins. Co., 181 N.Y.S. 363 (1920), (life policy) ; O’Rourke v. John Hancock Mutual Life Ins. Co., 23 R.I. 457, 50 A. 834 (1902), (life policy); Clay v. Liberty Industrial Life Ins. Co., (La.App.), 157 So. 838 (1934), (life policy); Hicks v. Home Security Life Ins. Co., 226 N.C. 614, 39 S.E.2d 914 (1946), (life policy); Monahan v. Mutual Life Ins. Co., 103 Md. 145, 63 A. 211 (1906), (life policy). The rationale employed is not always clear. Some courts speak in terms of waiver. Others invoke estoppel. On occasion both doctrines are used interchangeably and without differentiation.³ Whatever the theory, a fact of overriding significance exists in every case — the insurer’s ability to promptly discover the misrepresentation after the loss has occurred. We prefer that diligence to be exercised at an earlier time — when the application for insurance is taken. The Rhode Island Court in O’Rourke v. John Hancock Mutual Life Ins. Co., 23 R.I. 457, 50 A. 834, expressed the same view in the following words, “The defendant argues that it is unreasonable to hold that a company is bound to have present knowledge of all that appears on its previous files. To this suggestion at the trial the judge asked the pertinent question: ‘Any more so than it was to ascertain that fact just after the boy died? They have taken the money. Now, just as soon as the boy died, and the beneficiary asks to be paid, then their records are looked up; then they saved the record.’ The Company had exactly the same information in its possession at the time the contract was made that it has now. If it is available at one time, it ought to be imputable at the other.”

We agree that in these peculiar circumstances the insurer, as a matter of law, is chargeable with actual knowledge of the misrepresentation and may not avoid liability. Our conclusion rests upon waiver. In the law of insurance waiver is defined as the giving up of a known privilege or power. It may be express or implied from circumstances and always involves consent, express or implied, but does not necessarily rise to the level of contract. Vance on Insurance, 470 (3d ed. 1951). Specifically we hold that the insurer waived its power to rescind the insurance contract by issuing the policy with knowledge that the insureds had fraudulently misrepresented a material fact in their application for insurance.

The judgment below is reversed, with direction to enter judgment in favor of the appellants and against the respondent for $10,000 with interest from July 24, 1961, until paid, and taxable costs below and here.⁴

Badt, J., concurs.

1 The question is poorly phrased. However, it was not contended below, or here, that its meaning is obscure and the applicants misled.

2 The distinction between a warranty and a representation disposes of an alternative argument offered by tbe insurer on this appeal. The insurer seeks to sustain the judgment in its favor by the “non-waiver” provision of the insurance contract. That provision denies power to an agent or representative of the insurer to waive any condition or provision of the policy. As the representation here involved is not a term of the policy, the non-waiver clause is inapplicable.

3 For the distinctions between waiver and estoppel read: Morris, “Waiver and Estoppel in Insurance Policy Litigation,” 105 U. of Penn.L.Rev. 925 (1957); Vance on Insurance, 470-546 (3d ed. 1951).

4 NRS 99.040 provides that interest upon an express contract shall be allowed at the rate of 7 percent per annum upon all money from the time it becomes due. The policy provides that “all adjusted claims shall be paid or made good to the assured within 60 days after presentation and acceptance of satisfactory proof of interest and loss at the office of this company.” The amount of loss is not in dispute. It is liquidated. The insurer acted within 60' days after proof of loss by cancelling the policy. The letter of cancellation is dated July 24, 1961. Interest runs from that date. Dollar Investment Corp. v. Modern Market, Inc., 77 Nev. 393, 365 P.2d 311 (1961). Compare Agricultural Ins. Co. v. Biltz, 57 Nev. 370, 64 P.2d 1042 (1937), and Arley v. Liberty Mutual, 80 Nev. 5, 388 P.2d 576 (1964), where the amount of the loss was disputed, i.e., unliquidated, and interest ran from date of judgment.

1 The premium paid was for a year, thus no continuity of conduct that would alert the insurer.